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Fire sales, default cascades and complex financial networks

Author

Listed:
  • Hamed Amini

    (University of Florida)

  • Zhongyuan Cao

    (INRIA Paris
    Université Paris-Dauphine)

  • Agnès Sulem

    (INRIA Paris)

Abstract

We present a general tractable framework to understand the joint impact of fire sales and default cascades on systemic risk in complex financial networks. Our limit theorems quantify how price-mediated contagion across institutions with common asset holdings can worsen cascades of insolvencies in a heterogeneous financial network during a financial crisis. For given prices of illiquid assets, we show that, under some regularity assumptions, the default cascade model can be transferred to a death process problem. We model the price impact using a specified inverse demand function and state limit theorems concerning the total shares sold and the equilibrium price of illiquid assets in a stylized fire sales model. In the numerical studies we investigate the effect of heterogeneity in network structure and price impact function on the final size of the default cascade and fire sales loss.

Suggested Citation

  • Hamed Amini & Zhongyuan Cao & Agnès Sulem, 2025. "Fire sales, default cascades and complex financial networks," Mathematics and Financial Economics, Springer, volume 19, number 1, October.
    • Handle: RePEc:spr:mathfi:v:19:y:2025:i:2:d:10.1007_s11579-024-00381-z
    DOI: 10.1007/s11579-024-00381-z
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